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Offshore Opportunities in a Changing Energy Landscape

Explore the offshore oil and gas industry's potential in a changing energy landscape. Discover the growth prospects, investment trends, and cost competitiveness of offshore projects. Learn about the role of non-OPEC supply, U.S. shale, and deepwater investments in meeting future energy demand.

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Offshore Opportunities in a Changing Energy Landscape

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  1. Greg HillPresident & Chief Operating Officer Macro Trends Point to Offshore Opportunities NOIA 2019 Fall MeetingOctober 10, 2019

  2. 2018 World Energy Outlook: IEA ScenariosHelp us to think about the future of Global Energy… • World population rising ~25% from 7.4 Billion in 2016 to 9.2 Billion in 2040, GDP growing 3.4% p.a. • World energy demand to grow at 1% CAGR 2016-40, equivalent to adding a new China + India • Oil & gas demand continue to grow out to 2040 in IEA’s Current Policies & New Policies Scenario • Sustainable Development Scenario has fossil fuels peaking and declining, but still maintaining oil and gas share at ~50% IEA Energy Scenarios – Primary Demand Outlook by Fuel BTOE 21.2% 25.4% Renewables/ Nuclear 24.3% 24.8% 39.3% Coal 28.4% 24.6% 27.5% Gas 23.5% 26.1% 22.3% Oil 12.6% Source: IEA World Energy Outlook 2018

  3. Global Liquids Demand GrowthOil projected to grow at ~1% CAGR to 2040, last 5 year avg. growth ~1.5 MMBD… Liquids Demand Projection to 2040 MMBD Source: IEA World Energy Outlook 2018

  4. Global Liquids Demand by Sector and RegionFuture demand driven by non-OECD countries, transportation & petrochemicals… MMBD CAGR(2017-2040) 0.6% CAGR 15% 2.2% 15% 110.9 Other Other** 10% 10% 0.2% Other Asia Pacific 13% Other Asia Pacific 13% 14% 14% India 8% 3.2% India 8% 5% 5% China 96.6 14% China 13% 1.1% 14% 13% Europe, ME, Africa, Russia Europe, ME, Africa, Russia 29% 27% 29% 0.2% 27% Cen/ SAmerica 6% 6% Lat Am 6% 0.4% 6% North America 23% North America 17% 23% -0.6% 17% Source: IEA World Energy Outlook 2018 New Policies Scenario; *Bio Fuels includes other smaller sectors; Other includes international bunkers and biofuels

  5. U.S. Shale: Growth Led by PermianTight oil grew rapidly, but growth slowing going forward… Rigs 2015-2018 2019-20 • Peak 1,115 ~1 MMBD/yr growth Debottleneck 2H19, IMO supportive Permian becomes growth driver Other Eagle Ford • Currently 646 Bakken Permian • Trough 248 Source: Baker Hughes (rigs), EIA

  6. OPEC ProductionDown >2.5 MMBD from October, Saudi leading cuts, Iran/Venezuela pressures… • ~40% of world supply • Historically claimed market share, since advent of shale – has taken market balancer approach • Dec-18 deal: 11 of 14 member countries pledged to cut 800 MBD total (3% each) from Oct-18 baseline of 32.5 MMBD • Net cuts at 1030 MBD as of Aug-19, led by Saudi which has agreed to maintain cuts till early 2020 • 3 exempt countries (Libya, Iran, Venezuela) down >1500 MBD since Oct-18 • Key uncertainties • Venezuela political tensions • Iran sanctions and deal with US • OPEC alignment on balancing markets Source: Bloomberg, Hess Analysis

  7. Non-U.S. Non-OPECProjects taking FID pre 2014 price-crash coming online… Non OPEC Oil Project Sanctions >$1 billion2 Non-US Non-OPEC Liquids SupplyCanada, Brazil, Norway, Mexico, Other Growth MMBD Main additions: Johan Sverdrup (Norway), Buzios (Brazil) NOTE: “Non-OPEC Liquids Supply” includes Crude, Condensate, NGLs & Biofuels; Includes processing gains Source: IEA Oil Market Report August 2019 with Hess Analysis, Wood Mackenzie for project details; S&P Global Platts

  8. Global Oil Supply MixTight oil achieves ~10% of global supply, conventional 60%, OPEC 35%... Source: IEA World Energy Outlook 2018

  9. Global Deepwater: Material Cost RebasingImproved economics, focusing on best investments… $B • U.S. shale investments recovered faster from 2014 price environment, while deepwater investment has remained more depressed • Supply and demand dynamics continue to underpin low cost inflation • Full spread rates (excluding rig day rates) forecast to be largely flat • Breakevens becoming competitive with shale • FID’s on the rise, but more selective, greater phasing, smaller subsea tiebacks • Deepwater investments driven by Latin America, with selective activity recover elsewhere APAC -50% Nor Sea Africa GOM Lat Am Index 2010 = 100 N.America Offshore Cost Environment Deepwater Rigs Vessels Equipment OCTG Steel Source: IHS (Deepwater Investment & Costs), PIRA (breakevens)

  10. Offshore Sector Plays a Key Role in Meeting Demand ~$5 trillion in offshore investment in oil and gas forecast to 2040… Liquids Demand & Supply Offshore Oil & Gas Investment Distribution of Proved Reserves World - MBOED • Global Supply – Liquids • Projections Billion dollars / year (2016) Ultra-deepwater Deepwater Shallow water Additional liquids to keep supply constant Liquids supply growth to meet demand Source: IEA WEO 2018, BP Statistical Review 2018, ExxonMobil Energy Outlook 2018

  11. Offshore Economics: Competitive with Onshore Low development costs and outstanding financial returns… Payout: Cum Cash Flow Positive ~8 yrs Post FID, down to $55/bbl Brent $75 Brent $65 Brent $55 Brent $45 Brent Years (1) Figures gross Woodmac data. Semi-sub facility. EUR 500 MMBO (2) Figures gross. Assumes zero acquisition cost. 1,500 horizontal well locations: 30 risked wells per section. GOR 2.5 mscf/bbl. Average forward $8.5 MM DC&F cost for ~7,000’ laterals (variable by operator). EUR based on Decline Curve Analysis for >2,000 horizontal Delaware wells online from Jan 2017 (data source RS Energy Group) with assumption of same EUR per well on average for all 1,500 forward Wolfcamp and Bone Spring wells. Total development EUR 1.6 BBOE, 1.0 BBO (3) Required WTI price for NPV10 neutral, assumes $5/bbl Brent-WTI differential. All numbers rounded.

  12. Sector Challenged in New Business EnvironmentNew oil price paradigm… $/ bbl Other estimates Forward Strip • New normal for oil price may be $60-$65 going forward • Energy weighting in the S&P 500 has gone from >10% in 2013 to 4.5% in 2019 • Industry stocks have suffered, with small companies, and service companies feeling the most pain Source: Bloomberg, Estimates from industry service providers

  13. New Industry ParadigmInnovation, collaboration and standardization required to thrive in new setting… Case for standardization Hess eg. of Lean execution and Innovation in the Bakken Frac Hz Wells Historic SS D&C cost per Well ($MM) Floating Production ~60% reduction since 2010-11 Directional Drilling Rotary Drilling Completions 3-D Seismic Logging Drilling Rotary Steerables Hydraulic Fracturing Seismic Industry has innovated despite price Hess Safety Journey (Gulf of Mexico) Severe + Significant Environment Rate Recordable Injury/Illness Frequency (RIIF) Source: Bloomberg, Company Data, Hess Internal

  14. TakeawaysGrowth in oil & gas demand continues, offshore sector plays key role… • Oil and gas will continue to be needed; demand for liquids will grow – albeit at a slower rate • All sources of supply will contribute to meeting demand – U.S. shale not enough • Material role for offshore, including Gulf of Mexico, thanks to improving economics • New reality – price will remain fragile; rate hikes won’t help • Innovation, standardization and collaboration are keys to survive and thrive • Efficiency and innovation can enable offshore projects to offer attractive returns vs shale • Need to apply same approaches as onshore to offshore to remain competitive

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